BOUNCING BACK: The Global Recovery Takes Hold
The interdependence of global markets left no one unscathed during the Great Recession. Reshaped economic models aimed at innovation are growth engines for recovery.
The financial crisis that swept across the globe over the past two years caused even the most dynamic economies to wilt. In fact, it was the world’s largest markets that suffered the biggest hits, but the interdependence of the global marketplace left no one unscathed.
In response, governments implemented massive fiscal stimulus packages and financial sector bailouts to curtail the contraction, and in 2009 signs of recovery began to emerge. Many countries are now forecasting growth in the year ahead, with reshaped economic models aimed at innovation, universally accepted as the greatest driver of a successful economy.
As the new year unfolds, nations from the Caribbean to Europe and Asia are taking stock of the bright spots from the darkest economic period in decades, and looking ahead toward renewed prosperity.
ALPINE NATION GETS HIGH MARKS FOR FINANCIAL STABILITY
Switzerland’s No. 1 ranking in the World Economic Forum’s annual Global Competitiveness survey for 2009-10 is evidence of its long-term economic stability and highly innovative and sophisticated business culture. However, the nation has not escaped the clutches of the crisis altogether. Switzerland’s real GDP dropped 1.8 percent last year, after growing just 1.7 percent in 2008. This can still be viewed as a relative success when compared to, for example, Germany’s 5-percent dip in 2009.
“While Switzerland was far from recession-proof in what proved to be a challenging year worldwide, the country was fortunate in not experiencing anywhere near as severe a correction as some of its neighbors,” says Mario Brossi, North American senior representative for Switzerland Trade and Investment Promotion.
The Alpine nation had its share of wins in the past year. Preliminary figures show that Switzerland gained 29 new investment projects and eight expansions from North American entities in 2009.
“This compares favorably with 2008 and suggests that a more positive long-term trend may be in the offing,” Brossi says, noting that he places great value on the expansions in particular because they indicate a high degree of satisfaction in Switzerland as a leading business center in Europe.
Notably, Microsoft announced plans for a significant expansion of the Microsoft Development Center in Zurich, where staffing is expected to grow from 45 to 200 in the next three years. The company cited excellent infrastructure, proximity to world-class universities and political and economic stability, as well as access to a multilingual and well-educated talent pool of IT professionals and developers as some of the deciding factors.
More good news came from Space Energy Group, which plans to commercialize space-based solar power (SBSP) and has opened its international headquarters in Schaffhausen. Also, Calif.-based Edwards Lifesciences Corp., a provider of heart valves and hemodynamic monitoring, announced the opening of its new regional headquarters in Nyon. The facility will serve Edwards’ growing EMEA operations and features a training center where physicians can educate their peers on new technologies and techniques that have the potential to drive better outcomes and lower costs. Edwards has an additional manufacturing facility in Horw.
Other origins of 2009 foreign direct investment (FDI) in Switzerland include England, Bulgaria, China, Finland, Japan, Taiwan, Spain, Sweden, and Venezuela. For example, The Economist relocated its international headquarters from London to Geneva.
Switzerland’s greatest strengths even during tough economic times continue to be its globally respected “nation brand” and leading ranking in FDI studies, according to Brossi. In addition to its top honor in the World Economic Forum’s latest survey, the 2009 World Competitiveness Yearbook, published by the Institute for Management Development, placed Switzerland first in Europe and fourth worldwide.
A top destination for companies involved in precision manufacturing, clean technology, life sciences and technology supporting emergency preparedness, Brossi says Switzerland has clearly emerged as a leading address for the European or global headquarters of multinational companies. The country’s two federal institutes of technology, in Zurich and in Lausanne, are hotbeds of innovation in these and other disciplines. Healthcare and medical technology also rank high on the list of Swiss strengths, and this sector will be the focus of upcoming media tours.
The next year or two will be a period of incremental improvement and slow growth, Brossi expects, and in the meantime, Switzerland will continue to inject federal funds to help bolster the economy and encourage greater lending and investment.
“Compared to 2009, which in many respects can be considered an ‘annus horribilis’ for the world at large,” Brossi says, “early glimmers of a gradual increase in exports and investment foreshadow a hopefully better year in 2010.”
CZECH REPUBLIC KEEPS MOMENTUM DESPITE DOWNTURN
The Czech Republic’s economy will grow by 1.4 percent this year, the Czech National Bank (CNB) expects, after falling about 4 percent last year. The projected growth is ahead of the European Union’s forecast of 0.8 percent. Industrial production, which dropped by more than 12 percent last year, is projected to grow by about 3 percent.
“We at CzechInvest do see strong signs of recovery,” says Alexandra Rudysarova, CEO of the investment and business development agency. Since late 2009, the agency has been handling more and more investment inquiries. “Compared to the same time last year, the increase is absolutely clear. So for us, 2009 will be one of the weakest years in terms of luring FDI for the Czech Republic. 2010 is going to be completely different,” says Rudysarova.
Stimulated first by investment incentives and later by the country’s entry into the European Union, FDI in the Czech Republic peaked in 2006 and 2007. Despite the global economic crisis that has since taken hold, the nation was able to retain most of its major industrial players.
“Only a handful of foreign investors decided to scrap their operation in the Czech Republic and move them elsewhere. No more than 10 companies did so,” says Jiri Sochor, head of public relations for CzechInvest, comparing that to the 1,300 projects that the agency has mediated since 1993.
Some of the companies that relocated simply moved one part of their operation while strengthening another. The electronics and engineering firm Siemens, for example, stopped its heavy machinery operation near Prague while investing in an R&D center and engineering operation elsewhere in the country. Similarly, AEES, which has produced car cables in the western part of the country for almost 20 years, closed its Czech manufacturing plant in Stribro last year but is investing more into its R&D center in PlzeÀ.
Meanwhile, the government has been taking steps to ease and streamline the Czech business environment, with some of the focus on expediting the building approval processes. It has further lowered the minimum amount of investment to $2.5 million (USD) for companies to qualify for state aid. Also, the corporate income tax was reduced from 22 to 19 percent over the last three years to help strengthen the economy. And due to the economic downturn, the government postponed some of the national grant schemes that were 100-percent financed from the state budget in favor of those co-financed by the European Union, enabling more money to be channeled into the economy in a time of government spending cuts.
One recent economic development victory came in 2008 when IBM, crediting the country’s drive for innovation, decided to establish its regional headquarters in Prague.
“We believe that the global economic slowdown is an opportunity for us,” Rudysarova says, touting the nation’s roads and telecommunications infrastructures and the growing office and industrial stock. Ten years ago, companies that were forced to optimize costs due to the slowing economy found the Czech Republic an accommodating location for their projects, and according to Rudysarova, the nation is “in a very good position to repeat such success.” The only difference this time is a greater focus on R&D and more high-tech investment, she said.
BELGIUM IS CLIMBING THE WORLD FINANCIAL LADDER
Belgium, with its central location, high productivity level and extensive infrastructure, particularly in the Flanders region, has withstood the global economic crisis relatively well. The nation, at the crossroads of European trade, has long offered businesses a stable, market-driven economy. Its recession came to an end in the third quarter of 2009, when real GDP rose by a half percentage point after four consecutive quarters of declining activity. The growth outlook in Belgium for 2010 improved in January, with the GDP forecasted to rise to 1.5 percent this year.
Patrick Herman, minister counselor of economic affairs at the Embassy of Belgium in Washington D.C., says Belgium will experience a sluggish recovery.
“Even though Belgium has indeed suffered a great deal since the beginning of the global crisis, with an economy expected to shrink 3.1 percent in 2009, government intervention and automatic stabilizers have weathered us from even more negative impacts—state guarantees have widely sheltered the banking system, anti-crisis measures have prevented a more adverse effect on unemployment levels…and the real estate market has remained quite resilient,” Herman says.
The nation managed to climb four positions on the World Economic Forum’s latest financial development report, released in October. The rankings were reshuffled heavily since 2008 due mostly to the impact of the global crisis on financial stability. The top position went to the U.K., with Australia second and the U.S. third, down from No. 1 last year. Belgium climbed from the 17th to the 13th position.
Government and industry have placed an increased emphasis on R&D in areas that are traditional in nature, discovery-based or futuristic—such as logistics, the life sciences and nanotechnology, respectively. Flanders, for example, offers companies a variety of incentives that include tax breaks for R&D personnel and funding for specific projects proposed by businesses.
Spending on R&D in Belgium is growing as a percentage of GDP. In specific areas, such as the ICT cluster near Leuven University, R&D spending is among the highest in Europe at $7,011 per employee, according to Flanders Investment & Trade. The life sciences are also strongly represented in R&D spending, notably through Janssen Pharmaceutica in the Antwerp province, along with other pharmaceutical, medical device and medical imaging companies, and more than 40 biotech firms. Other major sectors such as the automotive industry also have strong research bases in the region, much of it in-house but with the universities and research institutes playing a role.
To promote technical innovation in the region, Flanders recently introduced a new tax incentive for patents. The measure allows Belgian companies and Belgian branches of foreign companies to deduct 80 percent of their gross patent income from their tax base, which leads to a maximum effective tax rate of 6.8 percent on gross patent income.
HONG KONG, MAINLAND CHINA SHOW RESILIENCE
The greatest global economic development of the 21st century has been the rise of China. The nation experienced GDP growth of 9 to 13 percent from 2006-08, and even managed 8 percent growth in the face of the recession last year. China had the largest fiscal stimulus package in the world in 2008, in response to the global crisis, at $585 billion (USD), or 14 percent of its GDP, and it has led the world in recovery, with growth seen across the country despite a decline in exports.
Some 265 companies set up or expanded their business presence in Hong Kong alone in 2009 with the help of Invest Hong Kong, a government department focused on FDI and business setup and expansion assistance. The new or expanded firms are expected to create more than 6,000 new jobs in the near future.
“The positive investment promotion results last year demonstrate that Hong Kong remains the base in Asia from which overseas, Mainland and Taiwanese companies prefer to expand their business,” says Simon Galpin, director-general of investment promotion at Invest Hong Kong.
Geographically, Asia Pacific, Europe and North America accounted for 43, 35 and 18 percent, respectively, of the 265 investment projects. By sector, the top three performers were business and professional services including education services and design; technology including renewable energy; and special projects, which includes environmental technology and the wine sector.
“Hong Kong’s strategic location and international exposure make it an ideal two-way service platform for Mainland companies to go global and for foreign companies to access opportunities in the Mainland,” Galpin says. The city’s advantages, he adds, include low taxes, a free economy, world-class communications and transportation infrastructure, and the available talent pool.
Galpin’s agency noticed two trends last year—the number of companies coming from developed markets such as the U.S. East Coast, the U.K. and Japan increased exponentially; and these tended to be smaller, high-growth companies. Since the developed markets were hardest hit by the economic crisis, many businesses sought expansion plans in overseas markets, particularly Asia Pacific.
“Just as importantly, risk became a more important issue compared to previous years, leading these companies to set up in Hong Kong, which offers a secure platform from which to do business in Mainland China,” Galpin says.
Hong Kong’s current challenge is to maintain its status as a global financial center. “Hong Kong must constantly enhance its competitiveness and continue to evolve into a high value-added, knowledge-based economy to maintain its leading edge over global competitors and create more quality jobs,” Hong Kong Chief Executive Donald Tsang says in his 2009-10 Policy Address.
The government has been actively promoting the development of innovation and technology, and will allocate about $200 million to launch an “R&D Cash Rebate Scheme,” under which enterprises conducting applied R&D projects with the support of the Innovation and Technology Fund or in partnership with local designated research institutions will enjoy a cash rebate equal to 10 percent of their investments.
In addition to growing the region’s four traditional pillar industries of financial services, tourism, trading and logistics, and professional services, the government is now emphasizing six new industries for further development: education, medical, testing and certification, environmental services, innovation and technology, and cultural and creative. Invest Hong Kong has realigned its priority sectors and strengthened its research and aftercare capabilities in order to encompass the six new growth industries, Galpin says.
In promoting these target industries, Hong Kong’s government has proposed a package of measures to incentivize the redevelopment of more than 1,000 old industrial buildings for use in the six sectors. There are now 1,467 private industrial buildings in the metro areas and new towns in Hong Kong, with a total floor area of 17.4 million square meters. More than 1.1 million square meters are vacant.
Tsang wrote recently that these moves are part of a pragmatic response to the financial crisis. “Although Hong Kong has once again proved its resilience, and our markets have functioned smoothly, the crisis tells us something very important—that we cannot continue to rely so heavily on financial services to underpin our growth and progress,” Tsang said, in his published statement. “So, we must broaden and deepen our economy to make it even more resilient and to provide even more investment, business and job opportunities in future.”
BARBADOS STAYS AHEAD OF THE COMPETITION
Home to more than 4,000 transnational companies in sectors from international banking and insurance to call centers and manufacturing, Barbados has been working to draw new industry and FDI. The 166-square mile island, which is the most easterly in the Caribbean and has a population of 274,746, has had to absorb its share of losses related to the recession. Tourism, a major economic driver, fell 10-15 percent in the past 18 months. Estimates for recovery vary, but Barbados has secured more flights and connections from major markets and ramped up its international marketing. Expectations are that tourism will return to pre-2008 levels for the season beginning in December.
Barbados has been able to attract international manufacturers of high-tech products and equipment that generally are neither price-sensitive nor large, so that freight is not a major factor. Lenstec Inc., for example, manufactures intra-ocular lenses for cataract replacement in Barbados, and Pyramidal Technologies recently selected the island for the manufacturing of its new ballistics testing system, ALIAS.
“Barbados’ workforce is flexible, and has the level of education required to support ventures like these,” says Wayne Kirton, CEO of Invest Barbados.
The nation is also beginning to attract biotech companies, building on a current inventory that includes Ontario-based pharmaceutical firm Biovail Laboratories International SRL. The government expects to soon establish an R&D Centre of Excellence, a state-of-the-art biotech laboratory that will be leased in sections, obviating the need for significant investment on the part of startups.
Barbados has made tax treaties one of its foremost objectives for economic growth and integrity. Its network of tax and investment protection agreements now stands at 27, with nations including the U.S., Canada, U.K., Finland, Sweden, Norway, Switzerland and China. Treaties with five more countries were near completion in January, and another 11 were in negotiations. The double taxation agreements allow the foreign country to impose preferential withholding tax rates on income paid to the Barbadian entities, or lower tax rates on capital gains derived by the operation in Barbados. According to Kirton, the taxation laws and agreements reflect above-board tax information exchange policies, strong anti-money laundering and financial services regulation, and an established tax regime with specific international business incentives.
Kirton notes that Barbados is the only independent Caribbean country on the original Organization for Economic Cooperation and Development (OECD) white list, which is based on internationally agreed-upon standards for transparency and exchange of information. Being on the list “has garnered attention from companies looking to legitimize their investment structures—to upgrade to respectability, so to speak—and the new emerging investment powerhouse markets of China, India and Latin America are being explored aggressively,” Kirton says.
The nation has a wide variety of business incentive legislation, allowing international firms to enjoy low corporate tax rates, exemption from withholding tax on dividends or other income paid to non-residents, exemption from taxes on the transfer of certain assets or securities to non-residents, and freedom from exchange controls. International firms that establish themselves as regular business companies can be granted export allowances with the potential to reduce the effective tax rate to 1.75 percent.
“We are making changes to our incentive and regulatory legislation to create new or improved product offerings, to meet market opportunities that we see emerging, and at the same time we are reviewing our existing product offering to make sure it is appropriate and attractive enough in this changing financial world,” Kirton says. The government is placing a greater emphasis and offering more financial support for export-ready business models in several industries, while also facilitating the development of alternative energy investments such as waste-to-energy, solar and wind power.
Barbados, Kirton says, remains ahead of its competition as a welcoming and business-friendly environment. “We seek to stay competitive when it comes to the speed of bureaucratic decision-making, without compromising integrity and transparency,” he says, “and we intend to make sure that we deliver what we promise.”
TRINIDAD AND TOBAGO REAP BENEFITS OF ROBUST ECONOMY
Compared to most of its neighbors, Trinidad and Tobago has weathered the recession well. While others have faced steep declines in tourism, reduced FDI, and rising debt and unemployment, T&T’s economy has shown remarkable resilience. This, according to Minister of Finance Karen Nunez-Tesheira, is a result of the government seizing the opportunity during a period of high oil and gas prices to strengthen its economic fundamentals, run surpluses and build domestic savings and external reserves.
The nation’s population of 1.3 million saw extreme economic growth from 2001-06, when the expanding petro-chemical sector and the impact of buoyant domestic demand in construction and services increased GDP at an average rate of 8.9 percent per year. This growth began to level off in 2007, and a year later the international recession began to take its toll. Real GDP declined by just under 1 percent in 2009, a period of falling retail sales, declining construction activity, and contracting private sector credit. By international standards, this rate of decline could be viewed as a creditable performance, Nunez-Tesheira notes in her recent budget message.
The nation is now looking to capitalize on its advantages with new strategies designed to grow its energy and non-energy sectors. “We expect the recovery in economic growth in Trinidad and Tobago to be gradual. Our projections are for real GDP growth of around 2 percent in 2010, rising to 4 percent in 2011 and to 5-6 percent in 2012,” Nunez-Tesheira says.
The world’s leading exporter of ammonia and methanol and the main supplier of Liquefied Natural Gas (LNG) to the U.S., T&T will continue to provide incentives and support to manufacturers, negotiate increased market access, foster electronic trade and improve the business facilitation model.
“We remain focused on providing the required infrastructure to facilitate industrial growth and diversification, expand local business, create employment opportunities, increase domestic production and expand our export base,” Nunez-Tesheira says.
The country is developing new light industrial parks for business activities such as garment manufacturing, soya bean oil processing, distillery operations, steel fabrication and coating, welding and the manufacture of steel products. T&T currently has 17 such parks—all owned and managed by Evolving TecKnologies and Enterprise Development Company Limited (e TecK), a special purpose state agency under the Ministry of Trade & Industry—and these are home to over 500 tenants.
Eight more industrial parks are in the works. In addition, the planned Tamana InTech Industrial and Technology Park will be one of the largest of its kind in the world at 1,100 acres. The center will provide incubator facilities, research and training in IT and will promote the expansion of downstream energy products.
Located on a site used as a U.S. Air Force base during World War II, the Tamana InTech Park will be a catalyst for the transformation from an energy-based economy to a knowledge-based one. Tamana is being constructed with modern and sophisticated physical infrastructure, underground utilities corridors, first-class road networks and recreational facilities, as well as world class ICT infrastructure and services, including one of the region’s few Tier III data centers.
Plans are also in the works for the Trinidad and Tobago International Financial Centre (TTIFC), which will be located in a new Special Purpose Economic Zone and will be run by the government’s recently created TTIFC Management Company. This company is engaged in discussions with firms in asset management, commodities trading, international loans syndication, wealth management and carbon trading, as well as a special purpose funds management company to facilitate the development of small and medium enterprises.
BREWING GROWTH IN THE VIRGIN ISLANDS
The U.S. Virgin Islands suffered job losses, a halt in construction and a lack of investment as the recession struck over the past two years. But the territory, whose economy is based largely around tourism, petroleum products and rum, has nonetheless carved out a number of economic victories along the way.
“We’ve been able to aggressively implement some marketing strategies that have been keeping us ahead of the curve,” says Jerry Garcia, director of marketing and public relations for the USVI’s Economic Development Authority. The government is looking to entice foreign companies in the financial sector, alternative energy and R&D to stimulate the economy.
The territory has been celebrating two recently signed public-private partnerships with rum industry giants Diageo and Fortune Brands. The Diageo deal, perhaps the USVI’s greatest success story in decades, was announced in 2008 and has the company moving its rum production from Puerto Rico to a new high-capacity, $165 million distillery on St. Croix. The environmentally sound, state-of-the-art facility, expected to start operations in 2011, will have capacity to distill up to 20 million proof gallons per year and will produce all of the bulk rum used to make Captain Morgan products in the U.S.
Virgin Islands Gov. John P. deJongh Jr. referred to the commitment with London-based Diageo as “the greatest single financial step forward we have taken in this territory in 50 years.” Under the arrangement, the Virgin Islands and Diageo will each get $2 billion in federal rum tax rebates over 30 years of the agreement.
In November, deJongh signed the agreement with Illinois-based Fortune Brands, the largest U.S. spirits company, to keep Cruzan Rum on St. Croix. Under the 30-year agreement, the Virgin Islands commits to continue to share the cost of molasses, a critical input in rum production, as it has for the past several decades, and continue to invest a portion of tax revenues generated from the sales of locally produced rum to grow the Cruzan brand and the local rum industry. The government will also provide financing for the construction of a state-of-the-art wastewater treatment plant and to expand capacity of the Cruzan distillery by more than 50 percent. The U.S. Virgin Islands government sold $39 million in revenue bonds to finance the wastewater plant.
Also in recent months, the USVI announced its first development project using tax increment financing (TIF) as a vehicle for funding. The Public Finance and Economic Development authorities worked together on financing for the $15.7 million Island Crossing project on St. Croix. The public-private partnership with a local developer will result in employment for about 200 residents, with tenants including a Home Depot store, medical facilities, restaurants and offices. Through TIF, a government pledges a project’s anticipated tax revenues to fund public infrastructure improvements and other investments to support economic development goals.